Why Gold Shares are Limping

While during the nineties gold-control was designed to support the dollar,
since 2003 it has actually allowed the dollar to fall faster and further -
but without doing damage to the number-one symbol of "Amerikan" economic power:
the mighty Dow.

In fact, the Dow was the main beneficiary of this recent dollar-drop, as you
can see here:

(Focus mainly on the last two months of action here. The red boxes refer to
points made in an earlier essay.)

The interesting part here is that, since mid-2003, whenever the dollar even
stabilized the Dow has resumed a downward moevement. The last two months should
convince anyone that there is a definite negative correlation in effect.

At first blush, this makes no sense at all.

How could a rapidly deteriorating dollar be good for US stocks? A falling
dollar makes US assets less attractive to foreigners because repatriated profits
are worth less when changed to the home currency. It also makes foreign goods
more expensive at home, so Americans have less money left over to invest in
stocks, one would think, right?

Welcome to the brave new world of terminal fiat-decay.

In this "new economy" nothing makes sense anymore. Formerly predictable relationships
between economic parameters are turned on their head: (1) Gold and the Dow
are moving up and down in sync. (2) During the most serious recent phase of
dollar-decay from September to December 2004, US treasuries have remained largely
stable. (3) Gold bullion outpaces the mining shares. (4) During the recent
2001 recession and subsequent flip-flop recovery, US consumers have loaded
up on debt like never before - instead of saving like their forebears did.
(4) Official CPI numbers are slightly up but still benign as could be, but
the Fed is raising rates every chance it gets - and that even though the official
stance on the dollar is down and rising rates tend to support the dollar.

What gives? And now, gold control is supposed to enable the dollar to fall rather
than support it, as one would normally expect??

Yep.

How does that work?

It works because gold is no longer the real threat, and that's because an
artificially high dollar is no longer desirable. The US needs a drastically
lower dollar to (hopefully) start getting the mounting current account deficit
to reverse course.

It also needs a low greenback because the euro needs to be torpedoed if the
dollar-reserve system is to have any chance at survival. The US regime further
needs its currency to fall to attract foreign manufacturing to the US to make
up for the jobs lost to China - a brand new trend that most people are not
even aware of. And the recently inverse dollar-Dow relationship is now amply
documented by the charts above.

What the US cannot tolerate, however, is a powerful rising trend in
gold shares.

Gold shares are the only thing that can attract mainstream US investors away
from the mainstream stocks and so lead to a gold blow-off and a Dow collapse.
Americans don't invest much in bullion. Having been paper-trained' for several
generations now, they consider it "too cumbersome." You can't sell bullion
in your basement by calling your broker or making a few clicks online - but
with gold shares, you can do it.

The New Face of Gold Manipulation?

Apparently the bullion banks that are so short gold have either cleaned up
their act somehow or have otherwise insulated themselves against rising bullion
prices. As previously observed, all the several alleged "Maginot Lines" were
crossed without any apparent hickups in the financial system. (Or maybe the
gold camp's estimate of the bullion banks' resources were wrong, and the real
line is $500 gold? Who knows.)

The point is, rising gold no longer appears to be the number one enemy. As
long as the Dow is rising along with gold, a rising POG now seems tolerable
to the system.

If you were in the "gold-price management" business and wanted to keep US
investors from getting too hyped up about gold, what would you do? Would you
keep shorting gold when everybody and their brother is already on to your game,
or would you shift it to the shares, where nobody expects you to be active
- yet?

Would you do it in the price of bullion, into which you know few investors
are actually putting their money - or would you do it in the market segment
they all are piling into when gold starts looking good?

That's one way of explaining the lagging share prices. So far, it's pure speculation
and extrapolation from a few know factors. Maybe someone with a stronger motive
to prove this will look into it and find the evidence, but the point is that
bullion is the clear winner in this new era.

What is Driving Bullion Prices?

Another way to explain this consists of looking into who and what is pushing
the price of "physical", and whether those factors lie sufficiently within
the US government/banking sector's control to do anything about them. It's
more than "just" the falling dollar. The dollar has fallen about 40% since
its early 2002 peak - but gold has risen about 70% since its mid-2001 bottom!

Here is what may explain bullion's rise:

Muslims, Chinese, Indians, and Russians have no intention of enriching
companies of countries like South Africa, Australia, Canada - and especially
the US - by investing in their mining shares. They understand the value
of the metal itself (maybe with the exception of private Russian investors),
so that's what they go for. As far as these countries and areas' official
policies go, they don't mind destabilizing the dollar at all, as along
as it doesn't hurt them too much. Pumping money into US company stocks
- and therefore into the US economy - isn't these groups' top priority,
really. (When it comes to US productive assets, however, China doesn't
seem to mind. Gives it some nice leverage for the future, rather than potential
stock-loss risks)

In the long term, gold miners, though they profit from higher prices in
their own currencies, still have to operate in their own economies. As
far as US miners go, only those holding metal instead of cash as their
assets will be able to post serious profits when inflation goes from tame
to hyper as the world-wide dollar- drubbing continues.

India may be setting itself up to becoming the major bullion player in
the world. That only makes sense - because it already is. India's official
gold reserves are far below those of the major financial powers of the
world, but look at how much the population is estimated to own according
to India's Commerce and Industry Minister, Khamal Nath: Currently 9,000
tons, and soon expected to become 15,000 tons. That's about what GATA and
many others estimate al of the world's central banks to have left in terms
of actual, unencumbered gold reserves. (Which country do you think is better
prepared to weather the coming storm: the US - or India?)

Chinese and Japanese official gold buying is gaining momentum. At the
same time China intends to align its now spot-oriented domestic trading
to the world wide futures trading system, intending to become a major player
in the international gold trading arena. Yet, despite this official trend
toward derivatives and hedging practices, individual Chinese savers are
expected and officially encouraged by their government to buy and hold
physical to hedge against financial and currency risks. More on that in
the next section.

None of these factors lie within the sphere of US legislative or Fed control.

China's Role

It is by now almost unanimously accepted that China will succeed the US in
being hte world's economic locomotive at some point in time. It is only reasonable
to co0nclude that China is also slated to dominate the world's future financial
order, just as the US has since Bretton-Woods.

In the light of that, the following takes on a humongous significance for
the future of gold and its role in any future world monetary system: Zhou Xiaochuan,
the governor of the Peoples Bank of China, stated his vision of how gold will
figure into China's future monetary policy on September 6, 2004 at the London
Bullion Market Association's Annual Precious Metals Conference in Shanghai.
In his statement, he observed that:

"From the micro-economic perspective, allowing people to hold assets
in gold can improve social welfare benefitting both the country and its
people. Also, the dual characters of being an ordinary commodity and a
currency allow gold to well hedge against risks. So it is practical to
develop individual gold trading business."

One can only hope that "Amerikan" monetary officials will some day dispense
similarly profound and truthful advice to their own subjects.

By officially acknowledging that the Chinese regime is encouraging its people
to save gold bullion to hedge against currency risks, he points to the nature
of the emerging world financial order (of which the creation of the euro was
only the first step):

Fiat will be earned and spent
- while gold will be saved.

Even the world's central banks will eventually join this trend, because the
dollar as a reserve-asset is now largely history - and the euro is not really
set up to take over its function in that regard. The euro's cornerstone is "price-stability,
i.e., limited printing! A currency so limited cannot assume the dollar's "print
on demand" character that is so necessary for fulfilling its sole-reserve currency
objective Any current movements from dollar into euro-reserves are temporary.
The world's future reserve asset is gold, make no mistake about it.

(Does this mean that free markets will return and gold investors can breathe
easier? Unfortunately, no. Markets can only really be free if they have a true
free-market currency to operate on. It is still necessary to establish a private,
parallel bullion currency to achieve that.)

So, does it make more sense to bet on gold shares to start bucking this trend
again - or is it better to jump on the bandwagon and do as the Chinese do?

Personally, I'd go with the latter.

Does this mean that gold shares are "finished"?

Not by any means. But it pays to be discriminating. There are only a handful
of shares that managed to follow bullion in finishing 2004 higher than they
started, and there are only one or two gold mutual funds that repeated that
feat. More details on that, plus forecasts on where gold, the dollar, rates,
oil, and the yuan are headed are available to subscribers of the EURO VS
DOLLAR CURRENCY WAR MONITOR.

Just like driving your car, investing only makes sense
if you can see where you are going. The Euro vs Dollar Monitor is your golden
windshield wiper that removes the media's greasy film of financial misinformation
from your investment outlook. Don't drive your investment vehicle without it!